When Funds Go Out of Business

I used to write a lot about the managed futures space.  I love the strategy, but still think it is ripe for disruption.  Add on the fact that it has been a poor environment for these funds the last few years and HALF of all funds in existence since 2007 are now gone.  Time for the strategy to start outperforming?  (This chart only through 2012, expect worse #s this year.)

Source Altegris, HT @JBoorman  



Why You Should (NOT) Invest in Hedge Funds through 13Fs

I’ve done more articles on 13Fs than I can remember.  But I often get tired of hearing people repeat nonsense about 13Fs with no data to back it up.

Mark Yusko has a great oberservation in the below video, namely, the largest holdings are the WORST to follow.  However, there are a lot of people and funds that track the largest holdings.  Why?  Who knows, but likely they haven’t done the research.

For example, want to follow Baupost?  Great idea, top 10 holdings beat the markets but about 9% a year since 2000.  Want to follow Baupost’s top holding?  BAD IDEA.  Returns -0.9% a year, over 4% a year worse than the S&P.

Want to follow Warren?  About the same difference, 9% a year.

Across 20 of my favorite managers since 2000, investing in the top 1 idea underperforms investing in the top 10 ideas by 4% a year.  Massively bad idea. 70% of the funds top holding clone underperforms the top 10.

Still think the top holding is their high conviction idea?

(Source AlphaClone)


Risk Parity : The Interrogation

Gonna try and listen to this on the plane back to LA.

Webcast Replay

Download Slides


More from Bwater, Salient, and Invesco:

The All Weather Story


Investment Insights – When Yields Rise


Risk Parity in a Rising Rates Regime





Where in the Bitcoin Bubble Are We? Just Starting or About to End?

Investors should love bubbles.  That is where are lot of big money can be made.  Avoiding their destruction can be challenging of course.  A valuation anchor will help you recognize and avoid them, while a trendfollowing approach may help you ride them and get off before you crash and burn.  We published a paper a few years ago titled:  

Learning to Love Investment Bubbles: What if Sir Isaac Newton had been a Trendfollower?

For all my Bitcoin friends, where do you think we are on this chart?  (No position but having fun watching the show.) My guess is right about where “Newton’s friends get rich”.  Chart is in my paper courtesy of my crazy uncle Marc.

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Next Generation of ETFs

I sent this out to The Idea Farm this past weekend, but it is worth sharing.  From PWC

Download here:

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Weekend Reads

Three good reads this weekend from Barron’s and the WSJ.  

First, the Barron’s ETF Roundtable.  

Next, an interview with Ben Inker at GMO, much of which resonates with our thinking:


What’s your current asset-allocation mix?

Our benchmark-free allocation fund is long only and built out of traditional assets, namely stocks, bonds, and cash. Right now, a little bit more than half of our money is in stocks spread across three basic groups: U.S. quality stocks, EAFE [Europe, Australasia, Far East] value stocks, which cover developed countries outside the U.S. and Canada, and emerging-market value stocks. Those are the only equities, when we look around the world, priced to deliver returns commensurate with the risks associated with equities. There is no reason to own international growth stocks or U.S. small-caps. However, figuring out whether we should be 52% in equities or 65% or 35% is a little harder.

How do equity valuations look?

Stocks are all priced more expensively than we’ve seen, on average, in history. So U.S. quality stocks have spent most of history looking more attractive than they do today, and it’s similar for international value stocks. They are still priced to beat cash and bonds. But depending on how quickly you think they are going to revert to historical averages—if you think they are going to revert at all—stocks may be more dangerous than normal.

Your firm, GMO, has been pretty bearish on U.S. stocks, even as they’ve had a big rally. What’s your take on that?

On one level, that is absolutely true—since the fall of 2010, we have forecast that the S&P 500 would have modest returns, and it has obviously done better than that. But we don’t necessarily consider this to be an error, in the sense that we know overvalued markets can get more overvalued before they come back to fair value. At any point where the market winds up overvalued, we will have underestimated the return over that seven-year period. Since our last completed forecast in September 2006, the S&P 500′s real annual return is 3.5%, versus the -0.6% we were forecasting. That difference can be completely explained by the fact that the S&P is trading at a high P/E [price-earnings] ratio on high profit margins. But a market that stays overvalued will outperform our forecast in the shorter run and underperform in the long run.

What are your biggest concerns with the stock market?Our problem is not strictly that it has gone up. Our problem is that the S&P 500 is up this year about 25% or 26% on earnings that are up 3%. So we’ve got a market that is rising because of P/E expansion. That would be OK if the market had started out at eight times earnings, but it didn’t start out there. So we have a market that is trading at an increasingly high P/E at a time when profit margins are already as good as we have ever seen. So the likelihood of strong profit growth from here is pretty dim.  That’s a lousy market if the P/E is too high, profits are unlikely to grow strongly and all you can hope for is that the P/E goes up even more. We don’t like investing on that basis.are unlikely to grow strongly and all you can hope for is that the P/E goes up even more. We don’t like investing on that basis.

Time Spent Before Making a Purchase

I made a offhand remark on Twitter awhile back but was curious about how much time people spend researching before purchasing something. 

“Amount of time people likely spend researching buying a: car > tv > plane ticket >  crowdfunded startup > stock. My guess it is exponential.”

The irony of course is the volatility and spread of the results is much higher at the right side than the left…

Anyone seen any research or surveys on how much time people spend researching X before buying?

Thanks in advance, will share results…

Asset Allocation Tactical Backtester Download

I’m not sure why I didn’t do this before now, but I’m going to try and make a simple asset allocation backtest Excel sheet available to the readers of The Idea Farm.  I’m trying to figure out how to hide and lock the data in Excel to avoid any issues etc.  But the goal is to have a simple buy and hold and tactical backtester available like Shiller’s download from his site. I was going to do it as a website but want to see what sort of interest there is first…

It will include:

-5 – 20 basic asset classes (US Stocks, Foreign Stocks, Bonds, REITs, Commodities)

-ability to backtest any buy and hold strategy

-ability to alter the % allocations to create any basic allocation

-ability to backtest simple moving average strategies

-ability to backtest relative strength & momentum strategies

-ability to combine trend and momentum strategies

-ability to alter cash management strategies

-(maybe) ability to expand with as many asset classes as users want

- (maybe) create a forum where users can interact and improve upon the simple sheet in any manner they choose.

So, sign up this week to The Idea Farm so as not to miss out!  I’ll send out the excel in a week or two once it is setup.  

What Works Better, Earnings or Dividends?

I wanted to take a look at another long term valuation metric to see how it does relative to our CAPE metric from our paper  Global Value: Building Trading Models with the 10 Year CAPE . So, we ran the same study with dividends as we did with earnings.  Short summary:  CAPD works well but CAPE is the winner…also didn’t seem to matter what timeframe one used for dividends…

Off to the beach in Sayulita for some fish tacos and stand up paddleboarding…


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Top 10 ETF Launches of the Year

I think this is a really interesting article for a few reasons. 

1. The continued acceptance of ETFs by large institutions.  Not just acceptance, but also CREATION.  A number of these ETFs were created by an institution willing to seed the fund at size, and going to an ETF provider to launch the fund. I used to write about this on the blog, and it surprises me that more family offices do not do this with their active taxable strategies.  Theoretically one could even get creative with how it was structured to benefit the institution if the product was very successful.  I had no idea Fisher was behind a few of these.

(If you’re interested, contact me!)

2.  It surprised me that many ETNs were on the list.  People are unconcerned about credit risk.

3.  Notice how hard it is to launch a successful ETF, over 150 launches at it looks like it took at least $150m to break the top 10.  $20-$40m is breakeven for most funds.

4.  And, of course, my favorite is #10!

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